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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from              to             
Commission file number: 001-34511
______________________________________
FORTINET, INC.
(Exact name of registrant as specified in its charter)
______________________________________

Delaware77-0560389
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

899 Kifer Road
Sunnyvale, California 94086
(Address of principal executive offices, including zip code)

(408) 235-7700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, $0.001 Par ValueFTNTThe Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes    No   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 


Table of Contents
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes       No  
As of November 3, 2023, there were 767,909,603 shares of the registrant’s common stock outstanding.




FORTINET, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2023
Table of Contents
 
  Page
PART IFINANCIAL INFORMATION
Item 1.
Item 2.
Item 3.
Item 4.
PART II—OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 5.
Item 6.






Summary of Risk Factors

Our business is subject to numerous risks and uncertainties, including those described in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q. You should carefully consider these risks and uncertainties when investing in our common stock. Some of the principal risks and uncertainties include:

Our operating results are likely to vary significantly and be unpredictable.

Adverse economic conditions, such as a possible economic downturn or recession, and possible impacts of inflation or stagflation, increasing or decreasing interest rates, instability in the global banking system or reduced information technology spending, including firewall, security and networking spending, may adversely impact our business.

We have been, and may in the future be, susceptible to supply chain constraints, supply shortages and disruptions, long or less predictable lead times for components and finished goods and supply changes because some of the key components in our products come from limited sources of supply.

As a result of supply chain disruptions in recent periods, we increased our purchase order commitments in recent periods and, as a result, may be required to accept or pay for components and finished goods regardless of our level of sales in a particular period, which may negatively impact our operating results and financial condition.

Our billings, revenue, and free cash flow growth may slow or may not continue, and our operating margins may decline.

Our real estate investments, including construction, acquisition and ongoing maintenance and management of office buildings, data centers and points of presence, as well as data center expansions or enhancements, could involve significant risks to our business.

Our backlog has fluctuated over past quarters and any decrease in growth or negative growth of in-quarter billings and revenue may not be reflected by our aggregate billings and revenue. As we have fulfilled, shipped and billed during a quarter to satisfy backlog, this has increased our aggregate billings and revenue during any particular quarter, and as the supply chain challenges normalize, the growth comparisons versus prior quarters where backlog contributed more to billings have become more challenging and may become increasingly challenging.

Any weakness in sales strategy, productivity and execution could negatively impact our results of operations.

We are dependent on the continued services and performance of our senior management, as well as our ability to hire, retain and motivate qualified personnel.

We rely on third-party channel partners for substantially all of our billings, revenue and a small number of distributors represents a large percentage of our revenue and accounts receivable.

Reliance on a concentration of shipments at the end of the quarter could cause our billings and revenue to fall below expected levels.

We rely significantly on revenue from FortiGuard security subscription and FortiCare technical support services, and revenue from these services may decline or fluctuate.

We have incurred indebtedness and may incur other debt in the future, which may adversely affect our financial condition and future financial results.

We generate a majority of billings, revenue and cash flow from sales outside of the United States.

We may not be successful in executing our strategy to increase our sales to large- and medium-sized end-customers.

A portion of our revenue is generated by sales to U.S. and foreign government organizations and other customers, which are subject to a number of regulatory requirements, challenges and risks.

The war in Ukraine, its related macroeconomic effects and our decision to reduce operations in Russia and the Israel-Hamas war have affected and may continue to affect our business.

1


We face intense competition in our market and we may not maintain or improve our competitive position.

We order components from third-party manufacturers based on our forecasts of future demand and targeted inventory levels, which exposes us to the risk of both product shortages, may result in lost sales and higher expenses, including excess inventory charges and costs related to future purchase commitments, and may require us to sell our products at discounts or offer various other incentives.

We depend on third parties to provide various components for our products and build our products and are susceptible to manufacturing delays, capacity constraints and cost increases.

We are susceptible to defects or vulnerabilities in our products or services, as well as reputational harm from the failure or misuse of our products or services, and any actual or perceived defects or vulnerabilities in our products or services or the failure of our products or services to detect or prevent a security incident, or the failure to help secure our customers or cause our products or services to allow unauthorized access to our customers network, could harm our operational results and reputation more significantly as compared to certain other companies given we are a security company.

Our inability to successfully acquire and integrate other businesses, products or technologies, or to successfully invest in and form successful strategic alliances with other businesses, could seriously harm our competitive position and could negatively affect our financial condition and results of operations. In addition, any additional future impairment of the value of our investment in Linksys Holdings, Inc. (“Linksys”) could negatively affect our financial condition and results of operations.

Investors’ and regulators’ expectations of our performance relating to environmental, social and governance factors may impose additional costs and expose us to new risks.

We are exposed to fluctuations in currency exchange rates, which could negatively affect our financial condition and results of operations.

Our proprietary rights may be difficult to enforce and we may be subject to claims by others that we infringe their proprietary technology.

The trading price of our common stock may be volatile, which volatility may be exacerbated by share repurchases under our Share Repurchase Program (the “Repurchase Program”).

Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.

Global economic uncertainty and weakening product demand caused by political instability, changes in trade agreements, wars and foreign conflicts, such as the war in Ukraine and the Israel-Hamas war or tensions between China and Taiwan, could adversely affect our business and financial performance.
2

Table of Contents
PART I—FINANCIAL INFORMATION

ITEM 1.     Financial Statements
FORTINET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in millions, except per share amounts)
 September 30,
2023
December 31,
2022
ASSETS
CURRENT ASSETS:
Cash and cash equivalents$2,186.8 $1,682.9 
Short-term investments962.2 502.6 
Marketable equity securities19.8 25.5 
Accounts receivable—net 1,013.8 1,261.7 
Inventory467.5 264.6 
Prepaid expenses and other current assets102.6 73.1 
Total current assets4,752.7 3,810.4 
LONG-TERM INVESTMENTS1.5 45.5 
PROPERTY AND EQUIPMENT—NET1,038.0 898.5 
DEFERRED CONTRACT COSTS569.9 518.2 
DEFERRED TAX ASSETS788.5 569.4 
GOODWILL125.4 128.0 
OTHER INTANGIBLE ASSETS—NET39.6 56.0 
OTHER ASSETS163.7 202.0 
TOTAL ASSETS$7,479.3 $6,228.0 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable$253.9 $243.4 
Accrued liabilities317.2 248.7 
Accrued payroll and compensation210.5 219.4 
Income taxes payable220.1 17.6 
Deferred revenue2,647.3 2,349.3 
Total current liabilities3,649.0 3,078.4 
DEFERRED REVENUE2,638.0 2,291.0 
INCOME TAX LIABILITIES61.8 67.8 
LONG-TERM DEBT991.8 990.4 
OTHER LIABILITIES64.6 82.0 
Total liabilities7,405.2 6,509.6 
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS’ EQUITY (DEFICIT):
Common stock, $0.001 par value—1,500.0 shares authorized; 776.3 and 781.5 shares issued and outstanding on September 30, 2023 and December 31, 2022, respectively
0.8 0.8 
Additional paid-in capital1,397.0 1,284.2 
Accumulated other comprehensive loss(24.3)(20.2)
Accumulated deficit(1,299.4)(1,546.4)
Total stockholders’ equity (deficit)74.1 (281.6)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)$7,479.3 $6,228.0 
See notes to condensed consolidated financial statements.
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Table of Contents

FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited, in millions, except per share amounts)
 Three Months EndedNine Months Ended
September 30,
2023
September 30,
2022
September 30,
2023
September 30,
2022
REVENUE:
Product$465.9 $468.7 $1,439.2 $1,240.4 
Service 868.7 680.8 2,450.5 1,894.0 
Total revenue1,334.6 1,149.5 3,889.7 3,134.4 
COST OF REVENUE:
Product198.3 185.2 566.4 501.4 
Service 119.4 97.8 354.9 286.2 
Total cost of revenue317.7 283.0 921.3 787.6 
GROSS PROFIT:
Product267.6 283.5 872.8 739.0 
Service 749.3 583.0 2,095.6 1,607.8 
Total gross profit1,016.9 866.5 2,968.4 2,346.8 
OPERATING EXPENSES:
Research and development156.9 134.3 461.3 383.5 
Sales and marketing504.4 427.1 1,498.6 1,230.2 
General and administrative53.5 40.7 156.2 124.7 
Gain on intellectual property matter(1.1)(1.1)(3.4)(3.4)
Total operating expenses713.7 601.0 2,112.7 1,735.0 
OPERATING INCOME303.2 265.5 855.7 611.8 
INTEREST INCOME37.0 4.6 89.2 8.3 
INTEREST EXPENSE(5.4)(4.5)(15.6)(13.5)
OTHER EXPENSE—NET(7.0)(0.9)(11.2)(19.3)
INCOME BEFORE INCOME TAXES AND LOSS FROM EQUITY METHOD INVESTMENT327.8 264.7 918.1 587.3 
PROVISION FOR (BENEFIT FROM) INCOME TAXES(0.3)27.3 48.6 21.6 
LOSS FROM EQUITY METHOD INVESTMENT
(5.2)(6.3)(32.6)(22.9)
NET INCOME INCLUDING NON-CONTROLLING INTERESTS322.9 231.1 836.9 542.8 
LESS: NET LOSS ATTRIBUTABLE TO NON-CONTROLLING INTERESTS, NET OF TAX
 (0.5) (0.7)
NET INCOME ATTRIBUTABLE TO FORTINET, INC.$322.9 $231.6 $836.9 $543.5 
Net income per share attributable to Fortinet, Inc. (Note 9):
Basic$0.41 $0.29 $1.07 $0.68 
Diluted$0.41 $0.29 $1.05 $0.67 
Weighted-average shares used to compute net income per share attributable to Fortinet, Inc.:
Basic781.2 786.2 783.1 795.0 
Diluted791.2 798.6 793.5 809.8 
See notes to condensed consolidated financial statements.
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Table of Contents
FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in millions)
 Three Months EndedNine Months Ended
 September 30,
2023
September 30,
2022
September 30,
2023
September 30,
2022
Net income including non-controlling interests$322.9 $231.1 $836.9 $542.8 
Other comprehensive loss:
Change in foreign currency translation(2.4)(3.7)(9.9)(16.5)
Change in unrealized gains (losses) on investments1.6 1.0 7.5 (10.7)
Less: tax provision (benefit) related to items of other comprehensive income or loss0.4 0.3 1.7 (2.4)
Other comprehensive loss(1.2)(3.0)(4.1)(24.8)
Comprehensive income including non-controlling interests321.7 228.1 832.8 518.0 
Less: comprehensive loss attributable to non-controlling interests (1.4) (4.8)
Comprehensive income attributable to Fortinet, Inc.$321.7 $229.5 $832.8 $522.8 
See notes to condensed consolidated financial statements.
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Table of Contents
FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)
(unaudited, in millions)
Three Months Ended September 30, 2023
 Common StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive Loss
Accumulated DeficitNon-Controlling InterestsTotal
Stockholders’ Equity
SharesAmount
BALANCE—June 30, 2023785.6 $0.8 $1,375.9 $(23.1)$(1,032.4)$ $321.2 
Issuance of common stock in connection with equity incentive plans - net of tax withholding1.1 — (25.1)— — — (25.1)
Repurchase and retirement of common stock
(10.4)— (15.3)— (589.9)— (605.2)
Excise tax on net stock repurchases
— — (2.8)— — — (2.8)
Stock-based compensation expense— — 64.3 — — — 64.3 
Net unrealized gain on investments - net of tax— — — 1.2 — — 1.2 
Foreign currency translation adjustment— — — (2.4)—  (2.4)
Net income— — — — 322.9  322.9 
BALANCE—September 30, 2023776.3 $0.8 $1,397.0 $(24.3)$(1,299.4)$ $74.1 
Three Months Ended September 30, 2022
 Common StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive Loss
Accumulated DeficitNon-Controlling Interests
Total (Deficit)
SharesAmount
BALANCE—June 30, 2022788.4 $0.8 $1,237.3 $(23.4)$(1,607.6)$13.3 $(379.6)
Issuance of common stock in connection with equity incentive plans - net of tax withholding1.9 — (26.0)— — — (26.0)
Repurchase and retirement of common stock(10.2)— (15.8)— (484.2)— (500.0)
Stock-based compensation expense— — 54.7 — — — 54.7 
Net unrealized gain on investments - net of tax
— — — 0.7 — — 0.7 
Foreign currency translation adjustment— — — (2.8)— (0.9)(3.7)
Net income (loss)— — — — 231.6 (0.5)231.1 
BALANCE—September 30, 2022780.1 $0.8 $1,250.2 $(25.5)$(1,860.2)$11.9 $(622.8)
See notes to condensed consolidated financial statements.
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Table of Contents
Nine Months Ended September 30, 2023
Common StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive Loss
Accumulated DeficitNon-Controlling InterestsTotal
Stockholders’ Equity (Deficit)
SharesAmount
BALANCE—December 31, 2022781.5 $0.8 $1,284.2 $(20.2)$(1,546.4)$ $(281.6)
Issuance of common stock in connection with equity incentive plans - net of tax withholding5.2 — (54.7)— — — (54.7)
Repurchase and retirement of common stock(10.4)— (15.3)— (589.9)— (605.2)
Excise tax on net stock repurchases
— — (2.8)— — — (2.8)
Stock-based compensation expense— — 185.6 — — — 185.6 
Net unrealized gain on investments - net of tax— — — 5.8 — — 5.8 
Foreign currency translation adjustment— — — (9.9)—  (9.9)
Net income— — — — 836.9  836.9 
BALANCE—September 30, 2023776.3 $0.8 $1,397.0 $(24.3)$(1,299.4)$ $74.1 
Nine Months Ended September 30, 2022
Common StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive Loss
Accumulated DeficitNon-Controlling InterestsTotal
Equity (Deficit)
SharesAmount
BALANCE—December 31, 2021810.0 $0.8 $1,253.6 $(4.8)$(467.9)$16.7 $798.4 
Issuance of common stock in connection with equity incentive plans - net of tax withholding6.1 — (110.6)— — — (110.6)
Repurchase and retirement of common stock(36.0)— (55.4)— (1,935.8)— (1,991.2)
Stock-based compensation expense— — 162.6 — — — 162.6 
Net unrealized loss on investments - net of tax— — — (8.3)— — (8.3)
Foreign currency translation adjustment— — — (12.4)— (4.1)(16.5)
Net income (loss)— — — — 543.5 (0.7)542.8 
BALANCE—September 30, 2022780.1 $0.8 $1,250.2 $(25.5)$(1,860.2)$11.9 $(622.8)
See notes to condensed consolidated financial statements.
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Table of Contents
FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in millions)
 Nine Months Ended
 September 30,
2023
September 30,
2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income including non-controlling interests$836.9 $542.8 
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation185.6 162.6 
Amortization of deferred contract costs195.9 163.8 
Depreciation and amortization83.2 77.0 
Amortization of investment premiums (discounts)(16.1)3.6 
Loss from equity method investment32.6 22.9 
Other 13.7 21.2 
Changes in operating assets and liabilities, net of impact of business combinations:
Accounts receivable—net243.4 (162.7)
Inventory(231.0)(59.7)
Prepaid expenses and other current assets(29.3)(7.6)
Deferred contract costs(247.5)(221.0)
Deferred tax assets(221.7)(172.0)
Other assets13.5 (13.9)
Accounts payable10.4 78.6 
Accrued liabilities56.9 33.7 
Accrued payroll and compensation(8.0)(3.2)
Income taxes payable196.8 (5.9)
Other liabilities(17.7)(0.5)
Deferred revenue646.2 742.8 
Net cash provided by operating activities1,743.8 1,202.5 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments(1,327.6)(389.1)
Sales of investments4.0 3.0 
Maturities of investments931.5 1,182.9 
Purchases of property and equipment(177.2)(250.3)
Purchase of investment in privately held company(8.5) 
Other0.1  
Net cash provided by (used in) investing activities(577.7)546.5 
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase and retirement of common stock(604.3)(1,991.2)
Proceeds from issuance of common stock36.0 21.7 
Taxes paid related to net share settlement of equity awards(90.8)(132.1)
Other(1.2)(1.3)
Net cash used in financing activities(660.3)(2,102.9)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
(1.9)(1.2)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS503.9 (355.1)
CASH AND CASH EQUIVALENTS—Beginning of period1,682.9 1,319.1 
CASH AND CASH EQUIVALENTS—End of period$2,186.8 $964.0 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes—net $84.9 $197.6 
Operating lease liabilities arising from obtaining right-of-use assets$14.3 $36.2 
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfers of evaluation units from inventory to property and equipment$24.5 $13.1 
Liability for purchase of property and equipment$24.7 $25.3 
Liability incurred for repurchase of common stock
$0.9 $ 
See notes to condensed consolidated financial statements.
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FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Preparation—The unaudited condensed consolidated financial statements of Fortinet, Inc. and its subsidiaries (collectively, “we,” “us” or “our”) have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information, as well as the instructions to Form 10-Q pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements, and should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2022, contained in our Annual Report on Form 10-K filed with the SEC on February 24, 2023. In the opinion of management, all adjustments, which include normal recurring adjustments, considered necessary for a fair presentation, have been included. The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for the full year or for any future periods. The condensed consolidated balance sheet as of December 31, 2022 is derived from the audited consolidated financial statements for the year ended December 31, 2022.

Amounts related to income taxes payable have been reclassified in prior periods to conform with current period presentation.

The condensed consolidated financial statements include the accounts of Fortinet, Inc. and its subsidiaries. We consolidate all legal entities in which we have an absolute controlling financial interest. All intercompany balances and transactions have been eliminated in consolidation.

The preparation of the condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

There have been no material changes to our significant accounting policies as of and for the three and nine months ended September 30, 2023, as compared to the significant accounting policies described in the Form 10-K.

Recently Adopted and Recently Issued Accounting Standards

There were no recently adopted accounting standards which would have a material effect on our condensed consolidated financial statements and accompanying disclosures, and no recently issued accounting standards that are expected to have a material impact on our condensed consolidated financial statements and accompanying disclosures.

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Table of Contents
FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2.     REVENUE RECOGNITION

Disaggregation of Revenue

The following table presents our revenue disaggregated by major product and service lines (in millions):
Three Months EndedNine Months Ended
September 30,
2023
September 30,
2022
September 30,
2023
September 30,
2022
Product$465.9 $468.7 $1,439.2 $1,240.4 
Service:
Security subscription494.6 369.8 1,373.6 1,023.1 
Technical support and other374.1 311.0 1,076.9 870.9 
Total service revenue868.7 680.8 2,450.5 1,894.0 
Total revenue$1,334.6 $1,149.5 $3,889.7 $3,134.4 

Deferred Revenue

During the three and nine months ended September 30, 2023, we recognized $514.3 million and $1.80 billion in service revenue that was included in the deferred revenue balance as of December 31, 2022, respectively. During the three and nine months ended September 30, 2022, we recognized $401.9 million and $1.37 billion in service revenue that was included in the deferred revenue balance as of December 31, 2021, respectively.

Transaction Price Allocated to the Remaining Performance Obligations

As of September 30, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations was $5.30 billion, which was substantially comprised of deferred security subscription, technical support services revenue and unbilled contract revenue from non-cancellable contracts that will be recognized in future periods. We expect to recognize approximately $2.66 billion as revenue over the next 12 months and the remainder thereafter.

Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount, net of an allowance for expected credit losses. We measure expected credit losses of accounts receivable on a collective (pooled) basis, aggregating accounts receivable that are either current or no more than 60 days past due, and aggregating accounts receivable that are more than 60 days past due. We apply a credit-loss percentage to each of the pools that is based on our historical credit losses. We review whether each of our significant accounts receivable that is more than 60 days past due continues to exhibit similar risk characteristics with the other accounts receivable in the pool. If we determine that it does not, we evaluate it for expected credit losses on an individual basis. Expected credit losses are recorded as general and administrative expenses on our consolidated statements of income.

The allowance for credit losses was $5.3 million and $3.6 million as of September 30, 2023 and December 31, 2022, respectively. Provisions, write-offs and recoveries were not material during the nine months ended September 30, 2023 and 2022.

Deferred Contract Costs
    
Amortization of deferred contract costs during the three months ended September 30, 2023 and 2022 were $68.0 million and $56.7 million, respectively. Amortization of deferred contract costs during the nine months ended September 30, 2023 and 2022 were $195.9 million and $163.8 million, respectively.

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FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

3.     FINANCIAL INSTRUMENTS AND FAIR VALUE

Available-for-Sale Securities

The following tables summarize our available-for-sale securities (in millions):
 
 September 30, 2023
 Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
U.S. government and agency securities$423.4 $0.1 $(0.5)$423.0 
Commercial paper400.0  (0.3)399.7 
Certificates of deposit and term deposits73.5   73.5 
Corporate debt securities68.0  (0.5)67.5 
Total available-for-sale securities$964.9 $0.1 $(1.3)$963.7 
 December 31, 2022
 Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
U.S. government and agency securities$198.0 $ $(4.4)$193.6 
Commercial paper26.5  (0.1)26.4 
Certificates of deposit and term deposits34.2   34.2 
Corporate debt securities293.0  (4.1)288.9 
Municipal bonds5.1  (0.1)5.0 
Total available-for-sale securities$556.8 $ $(8.7)$548.1 
The following tables show the gross unrealized losses and the related fair values of our available-for-sale securities that have been in a continuous unrealized loss position (in millions):
September 30, 2023
 Less Than 12 Months12 Months or GreaterTotal
 Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
U.S. government and agency securities$159.1 $(0.1)$32.6 $(0.4)$191.7 $(0.5)
Commercial paper376.6 (0.3)  376.6 (0.3)
Corporate debt securities15.3  46.4 (0.5)61.7 (0.5)
Total available-for-sale securities$551.0 $(0.4)$79.0 $(0.9)$630.0 $(1.3)
December 31, 2022
 Less Than 12 Months12 Months or GreaterTotal
 Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
U.S. government and agency securities$3.9 $(0.1)$189.8 $(4.3)$193.7 $(4.4)
Commercial paper26.4 (0.1)  26.4 (0.1)
Corporate debt securities90.5 (0.8)190.0 (3.3)280.5 (4.1)
Municipal bonds5.0 (0.1)  5.0 (0.1)
Total available-for-sale securities$125.8 $(1.1)$379.8 $(7.6)$505.6 $(8.7)

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FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The contractual maturities of our investments were (in millions):
 September 30,
2023
December 31,
2022
Due within one year$962.2 $502.6 
Due within one to three years1.5 45.5 
Total$963.7 $548.1 

Available-for-sale securities are reported at fair value, with unrealized gains and losses and the related tax impact included as a separate component of equity (deficit) and in comprehensive income. We do not intend to sell any of the securities in an unrealized loss position and it is not more likely than not that we would be required to sell these securities before recovery of their amortized cost basis, which may be at maturity.

Realized gains and losses on available-for-sale securities were insignificant in the periods presented.

Marketable Equity Securities

Our marketable equity securities were $19.8 million and $25.5 million as of September 30, 2023 and December 31, 2022. The changes in fair value of our marketable equity securities are recorded in other expense—net on the condensed consolidated statements of income. We recognized a $2.3 million and $5.7 million loss during the three and nine months ended September 30, 2023, respectively. We recognized a $2.6 million gain and a $11.7 million loss during the three and nine months ended September 30, 2022, respectively.

Fair Value of Financial Instruments

Fair Value Accounting—We apply the following fair value hierarchy for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments.

Level 3—Unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. The inputs require significant management judgment or estimation.

We measure the fair value of money market funds, certain U.S. government and agency securities and marketable equity securities using quoted prices in active markets for identical assets. The fair value of all other financial instruments was based on quoted prices for similar assets in active markets, or model-driven valuations using significant inputs derived from or corroborated by observable market data.

We classify investments within Level 1 if quoted prices are available in active markets for identical securities.

We classify items within Level 2 if the investments are valued using model-driven valuations using observable inputs such as quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. Investments are held by custodians who obtain investment prices from a third-party pricing provider that incorporates standard inputs in various asset price models.

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FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Assets Measured at Fair Value on a Recurring Basis

The following tables present the fair value of our financial assets measured at fair value on a recurring basis (in millions):
 September 30, 2023December 31, 2022
 Aggregate
Fair
Value
Quoted
Prices in
Active
Markets For
Identical
Assets
Significant
Other
Observable
Remaining
Inputs
Significant
Other
Unobservable
Remaining
Inputs
Aggregate
Fair
Value
Quoted
Prices in
Active
Markets For
Identical
Assets
Significant
Other
Observable
Remaining
Inputs
Significant
Other
Unobservable
Remaining
Inputs
  (Level 1)(Level 2)(Level 3) (Level 1)(Level 2)(Level 3)
Assets:
U.S. government and agency securities$474.1 $402.4 $71.7 $ $268.6 $259.3 $9.3 $ 
Commercial paper439.5  439.5  115.8  115.8  
Certificates of deposit and term deposits93.5  93.5  50.4  50.4  
Corporate debt securities67.5  67.5  288.9  288.9  
Money market funds325.0 325.0   593.9 593.9   
Municipal bonds    5.0  5.0  
Marketable equity securities19.8 19.8   25.5 25.5   
Total$1,419.4 $747.2 $672.2 $ $1,348.1 $878.7 $469.4 $ 
Reported as:
Cash equivalents$435.9 $774.5 
Marketable equity securities19.8 25.5 
Short-term investments962.2 502.6 
Long-term investments1.5 45.5 
Total$1,419.4 $1,348.1 

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the nine months ended September 30, 2023 and year ended December 31, 2022.

4.     INVENTORY

Inventory consisted of (in millions):
 September 30,
2023
December 31,
2022
Raw materials$77.5 $46.3 
Work in process8.0 12.0 
Finished goods382.0 206.3 
Inventory$467.5 $264.6 

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FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


5.     PROPERTY AND EQUIPMENT—Net

Property and equipment—net consisted of (in millions):
 
 September 30,
2023
December 31,
2022
Land$351.7 $310.0 
Buildings and improvements591.7 490.3 
Computer equipment and software252.3 222.7 
Leasehold improvements60.6 53.5 
Evaluation units27.5 19.2 
Furniture and fixtures30.5 31.3 
Construction-in-progress55.8 51.7 
Total property and equipment1,370.1 1,178.7 
Less: accumulated depreciation(332.1)(280.2)
Property and equipment—net$1,038.0 $898.5 

During the three months ended June 30, 2023, we purchased certain real estate in Spain and the United States for a total purchase price of $51.9 million. The purchases were accounted for under the asset acquisition method. The cost of the assets acquired was allocated to land and buildings and improvements based on their relative fair values. The total purchase price was allocated as $6.5 million to land and $45.4 million to buildings and improvements.

During the three months ended September 30, 2023, we purchased certain real estate in Australia for a total purchase price of $41.3 million. The purchase was accounted for under the asset acquisition method. The cost of the assets acquired was allocated to land and construction-in-progress based on their relative fair values. The total purchase price was allocated as $21.5 million to land and $19.8 million to construction-in-progress.

Depreciation expense was $23.9 million and $21.2 million during the three months ended September 30, 2023 and 2022, respectively. Depreciation expense was $69.6 million and $59.4 million during the nine months ended September 30, 2023 and 2022, respectively.

6.     INVESTMENTS IN PRIVATELY HELD COMPANIES

Linksys Holdings, Inc.

During 2021, we invested $160 million in cash for shares of the Series A Preferred Stock of privately held Linksys Holdings, Inc. (“Linksys”), representing a 50.8% ownership interest in the outstanding common stock (on an as-converted basis). Linksys provides router connectivity solutions to the consumer and small business markets.

We have concluded that our investment in Linksys is an in-substance common stock investment and that we do not hold an absolute controlling financial interest in Linksys, but that we have the ability to exercise significant influence over the operating and financial policies of Linksys. Determining that we have significant influence but not control over the operating and financial policies of Linksys required significant judgement of many factors, including but not limited to the ownership interest in Linksys, board representation, participation in policy-making processes and participation rights in certain significant financial and operating decisions of Linksys in the ordinary course of business. Therefore, we determined to account for this investment using the equity method of accounting. We record our share of Linksys’ financial results on a three-month lag basis. We determined that there was a basis difference between the cost of our investment in Linksys and the amount of underlying equity in net assets of Linksys. Our share of loss of Linksys’ financial results, as well as our share of the amortization of the basis differences, totaled $5.2 million and $6.3 million for the three months ended September 30, 2023 and 2022, respectively, and has been recorded in loss from equity method investment on the condensed consolidated statements of income. Our share of loss of Linksys’ financial results, as well as our share of the amortization of the basis differences, totaled $32.6 million and $22.9 million for the nine months ended September 30, 2023 and 2022, respectively, and has been recorded in loss from equity method investment on the condensed consolidated statements of income. The carrying amount of our Linksys investment was $51.6 million and $84.3 million as of September 30, 2023 and December 31, 2022, respectively, and the investment was included in other assets on our condensed consolidated balance sheets.
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FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


In the fourth quarter of 2022, we recorded a non-cash charge of $22.2 million related to other-than-temporary impairment (“OTTI”) recognized on our equity method investment in Linksys and our proportionate share of Linksys' financial results included a $17.5 million charge in connection with a valuation allowance established on deferred tax assets at Linksys. Due to the presence of impairment indicators, such as a series of operating losses, we evaluated our equity method investment for an OTTI during the three months ended September 30, 2023. We considered various factors in determining whether an OTTI has occurred, including the limited operating history available, our ability and intent to hold the investment until its fair value recovers, the implied revenue valuation multiples compared to guideline public companies, Linksys’ ability to achieve milestones and any notable operational and strategic changes. After the evaluation, we determined that an additional OTTI has not occurred as of September 30, 2023. However, we may be required to recognize an impairment loss in future reporting periods if and when our evaluation of the aforementioned factors indicates that the investment in Linksys is determined to be other than temporarily impaired. Such determination will be based on the prevailing facts and circumstances at that time, including the results and disclosures of Linksys.

Other Investment

On August 1, 2023, we invested $8.5 million in cash for a 19.5% ownership interest in the outstanding common stock of a privately held company that provides rugged ethernet switches, 4G/5G industrial routers and media converters for critical infrastructure customers. We accounted for our investment as an equity method investment since we have the ability to exercise significant influence, but not control, over the operating and financial policies of the privately-held company.

We will record our proportionate share of the company’s financial results on a three-month lag basis and will present it in loss from equity method investments—net on the condensed consolidated statements of income.

7.     BUSINESS COMBINATIONS

Alaxala Networks Corporation

On August 31, 2021, we closed an acquisition of 75% of equity interests as controlling interests in Alaxala Networks Corporation (“Alaxala”), a privately held network hardware equipment company in Japan, for $64.2 million in cash. On October 3, 2022, we acquired the remaining 25% of equity interests in Alaxala for $13.5 million in cash, and Alaxala became our wholly owned subsidiary. We acquired the equity interests in Alaxala to broaden our offering of secure switches integrated with our Core Platform and Enhanced Platform Technology functionality, and over time, to innovate and rebrand certain of Alaxala’s switches to offer a broader suite of secure switches globally.


8.     GOODWILL AND OTHER INTANGIBLE ASSETS—Net

Goodwill

The following table presents the changes in the carrying amount of goodwill (in millions):
Amount
Balance—December 31, 2022$128.0 
Foreign currency translation adjustments(2.6)
Balance—September 30, 2023$125.4 

There were no impairments to goodwill during the nine months ended September 30, 2023 or during prior periods.


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FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Other Intangible Assets—Net

The following tables present other intangible assets—net (in millions, except years):
September 30, 2023
 Weighted-Average Useful Life (in Years)GrossAccumulated AmortizationNet
Other intangible assets—net:
Finite-lived intangible assets:
Developed technologies4.3$82.3 $59.7 $22.6 
Customer relationships7.030.0 16.7 13.3 
Trade name10.04.7 1.0 3.7 
Backlog1.03.7 3.7  
Total other intangible assets—net$120.7 $81.1 $39.6 
December 31, 2022
 Weighted-Average Useful Life (in Years)GrossAccumulated AmortizationNet
Other intangible assets—net:
Finite-lived intangible assets:
Developed technologies4.1$85.1 $50.3 $34.8 
Customer relationships7.131.0 14.4 16.6 
Trade name10.05.3 0.7 4.6 
Backlog1.04.2 4.2  
Total other intangible assets—net$125.6 $69.6 $56.0 

Amortization expense was $4.4 million and $5.2 million during the three months ended September 30, 2023 and 2022, respectively. Amortization expense was $13.6 million and $17.6 million during the nine months ended September 30, 2023 and 2022, respectively.

The following table summarizes estimated future amortization expense of finite-lived intangible assets—net (in millions):
 Amount
Years:
2023 (the remainder of 2023)$4.0 
202412.7 
20258.2 
20264.1 
20273.8 
Thereafter6.8 
Total$39.6 

9.     NET INCOME PER SHARE

Basic net income per share is computed by dividing net income attributable to Fortinet, Inc., by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing net income attributable to Fortinet, Inc. by the weighted-average number of shares of common stock outstanding during the period, plus the dilutive effects of restricted stock units (“RSUs”), stock options and performance stock units (“PSUs”). Dilutive shares of common stock are determined by applying the treasury stock method.

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FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

A reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per share attributable to Fortinet, Inc. is (in millions, except per share amounts):
 Three Months EndedNine Months Ended
 September 30,
2023
September 30,
2022
September 30,
2023
September 30,
2022
Numerator:
Net income including non-controlling interests$322.9 $231.1 $836.9 $542.8 
Net loss attributable to non-controlling interests (0.5) (0.7)
Net income attributable to Fortinet, Inc.$322.9 $231.6 $836.9 $543.5 
Denominator:
Basic shares:
Weighted-average common stock outstanding-basic781.2 786.2 783.1 795.0 
Diluted shares:
Weighted-average common stock outstanding-basic781.2 786.2 783.1 795.0 
Effect of potentially dilutive securities:
RSUs 3.5 4.9 3.8 6.6 
Stock options6.2 7.5 6.4 8.2 
PSUs0.3  0.2  
Weighted-average shares used to compute diluted net income per share attributable to Fortinet, Inc.791.2 798.6 793.5 809.8 
Net income per share attributable to Fortinet, Inc.:
Basic$0.41 $0.29 $1.07 $0.68 
Diluted$0.41 $0.29 $1.05 $0.67 

The following weighted-average shares of common stock were excluded from the computation of diluted net income per share attributable to Fortinet, Inc. for the periods presented, as their effect would have been antidilutive (in millions):
 Three Months EndedNine Months Ended
 September 30,
2023
September 30,
2022
September 30,
2023
September 30,
2022
RSUs  2.5 0.6 1.1 
Stock options3.0 1.6 2.8 1.4 
Total 3.0 4.1 3.4 2.5 


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FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10.     DEBT

2026 and 2031 Senior Notes

On March 5, 2021, we issued $1.0 billion aggregate principal amount of senior notes (collectively, the “Senior Notes”), consisting of $500.0 million aggregate principal amount of 1.0% notes due March 15, 2026 (the “2026 Senior Notes”) and $500.0 million aggregate principal amount of 2.2% notes due March 15, 2031 (the “2031 Senior Notes”), in an underwritten registered public offering. The Senior Notes are senior unsecured obligations and rank equally with each other in right of payment and with our other outstanding obligations. We may redeem the Senior Notes at any time in whole or in part for cash, at specified redemption prices that include accrued and unpaid interest, if any, and a make-whole premium. However, no make-whole premium will be paid for redemptions of the 2026 Senior Notes on or after February 15, 2026, or the 2031 Senior Notes on or after December 15, 2030. Interest on the Senior Notes is payable on March 15 and September 15 of each year, beginning on September 15, 2021. As of September 30, 2023 and December 31, 2022, the Senior Notes were recorded as long-term debt, net of discount and issuance costs, which are amortized to interest expense over the respective contractual terms of these notes using the effective interest method.

The total outstanding debt is summarized below (in millions, except percentages):
 MaturityCoupon RateEffective Interest RateSeptember 30,
2023
December 31,
2022
Debt
2026 Senior NotesMarch 20261.0%1.3%$500.0 $500.0 
2031 Senior NotesMarch 20312.2%2.3%500.0 500.0 
Total debt1,000.0 1,000.0 
Less: Unamortized discount and debt issuance costs8.2 9.6 
Total long-term debt$991.8 $990.4 

As of September 30, 2023 and December 31, 2022, we accrued interest payable of $0.7 million and $4.7 million, respectively, and there are no financial covenants with which we must comply. During the three months ended September 30, 2023 and 2022, we recorded $4.5 million and $4.4 million of total interest expense in relation to these Senior Notes in each quarter, respectively. During the nine months ended September 30, 2023 and 2022, we recorded $13.5 million and $13.4 million of total interest expense in relation to the Senior Notes in each period, respectively. No interest costs were capitalized for the nine months ended September 30, 2023 and 2022, as the costs that qualified for capitalization were not material.

The total estimated fair value of the outstanding Senior Notes was approximately $834.8 million, including accrued and unpaid interest, as of September 30, 2023. The fair value was determined based on observable market prices of identical instruments in less active markets. The estimated fair values are based on Level 2 inputs.

11.     COMMITMENTS AND CONTINGENCIES

The following table summarizes our inventory purchase commitments as of September 30, 2023 (in millions):